Takeovers and equisitions
|} Начало формы Corporate takeovers became a prominent feature of the American business landscape during the seventies and eighties. A hostile takeover usually involves a public tender offer—a public offer of a specific price, usually at a substantial premium over the prevailing market price, good for a limited period, for a substantial percentage of the target firm's stock. Unlike a merger, which requires the approval of the target firm's board of directors as well as voting approval of the stockholders, a tender offer can provide voting control to the bidding firm without the approval of the target's management and directors. Because it allows bidders to seek control directly from shareholders—by going "over the heads" of target management—the tender offer is the most powerful weapon available to the hostile bidder. Indeed, just the threat of a hostile tender offer can often bring a recalcitrant target management to the bargaining table, especially if the bidder already owns a substantial block of the target's stock (called a foothold block) and can demonstrably afford to finance a hostile offer for control. Although hostile bidders still need a formal merger to gain total control of the target's assets, this is easily accomplished once the bidder has purchased a majority of voting stock. Hostile tender offers have been around for decades, but they were rare and generally involved small target firms until the midseventies. Then came the highly controversial multibillion-dollar hostile takeovers of very recognizable public companies. By the late eighties there were dozens of multi-billion-dollar takeovers and their cousins, leveraged buyouts (LBOs). The largest acquisition ever was the $25 billion buyout of RJR Nabisco by Kolberg Kravis and Roberts in 1989. note: this was written in 1992. Leveraged buyouts of small companies had also been common for decades, but in the eighties LBOs of large public companies became common. An LBO is a going-private transaction involving a tender offer for all of a firm's common stock, financed mostly by debt, made by a group usually involving some members of incumbent management. LBOs and leveraged cash-outs (first cousins of LBOs in which the target firm remains public because a small part of the compensation to selling shareholders is stock in the new, highly leveraged enterprise) rose to popularity for large public firms in the late eighties as a reaction to the hostile takeover activity. In essence the LBO was a way for management of a vulnerable public company to beat the hostile bidder to the punch, allowing management to buy out public shareholders at a premium and engage in the value-enhancing asset redeployments that otherwise would attract takeover entrepreneurs. The vulnerability arises from a large "value gap"—which is the difference between a company's value as a going concern under the policies of incumbent management and the expected higher value of the stock, factoring in the value of redeploying the target's assets. Incumbent managements learned to tap the vast financial muscle of Wall Street in the late eighties and to engage in these control transactions to avoid being the victims of hostile attack. Indeed, many of the large leveraged restructurings were taken in direct defense after a hostile bid had been made. Both economic and regulatory factors combined to spur the explosion in large takeovers and, in turn, large LBOs. The three regulatory factors were the Reagan administration's relatively laissez-faire policies on antitrust and securities laws, which allowed mergers the government would have challenged in earlier years; the 1982 Supreme Court decision striking down state antitakeover laws (which were resurrected with great effectiveness in the late eighties); and deregulation of many industries, which prompted restructurings and mergers. The main economic factor was the development of the original-issue high-yield debt instrument. The so-called "junk bond" innovation, pioneered by Michael Milken of Drexel Burnham, provided many hostile bidders and LBO firms with the enormous amounts of capital needed to finance multi-billion-dollar deals. Managers of target companies in takeover battles have access to a variety of defensive tactics, many invented during the turbulent eighties. These defensive measures have always been controversial because they necessarily pose a conflict of interest for management. A top manager's own narrow interest is to save his job, which he often loses after a takeover. His legal obligation is to get a good deal for shareholders, which often means allowing the takeover. Not surprisingly, some managers go with self-interest. The array of takeover defenses includes charter amendments that require supermajorities (i.e., votes of 70 percent or even 80 percent of shareholders) to approve a merger; dual-class restructurings that, by creating two classes of stock, concentrate voting control with management; litigation against the hostile suitor (usually alleging violations of antitrust and securities laws); and purchasing the hostile bidder's foothold stock at a premium to end the takeover threat (so-called green-mail payments). Although these particular defenses often are effective at delaying the hostile bidder, they rarely are enough to keep a target company independent. The two modern-day defensive weapons that can be "show-stoppers" are the poison pill and the state takeover laws. The term "poison pill" describes a family of "shareholder rights" that are triggered by an event such as a hostile tender offer or the accumulation of voting stock above a designated threshold (usually 15 percent of outstanding stock) by an unfriendly buyer. When triggered, poison pills provide target shareholders (other than the hostile bidder) with rights to purchase additional shares or to sell shares to the target on very attractive terms. These rights impose severe economic penalties on the hostile acquirer and usually also dilute the voting power of the acquirer's existing stake in the firm. Although poison pills are considered to be absolute deterrents to a hostile takeover, they can almost always be cheaply and quickly altered or removed by target management if they have not been irrevocably triggered. Therefore, they almost always are the subject of strenuous state-court litigation in takeover battles, and their practical effectiveness as an absolute deterrent has been decided in court more often than not. Today, the majority of large public companies are armed with poison pills of one type or another. State courts have allowed target managers to use pills to buy time (up to several months) to search for better third-party offers or develop value-creating corporate restructurings. In the late eighties the Supreme Court upheld the constitutionality of state takeover laws, the most important being Delaware's merger moratorium law. This law prohibits a hostile acquirer from formally merging with the target for at least three years after buying a controlling interest. Widely regarded as a major deterrent, the Delaware law has an exception if the hostile bidder can acquire more than 85 percent of the target's stock, excluding shares held by inside managers and by certain kinds of employee stock-ownership plans. Since the law passed, Delaware-incorporated companies (which account for the majority of medium-size and large public companies in the United States) have engaged in various kinds of transactions to "lock up" more than 15 percent of stock in friendly hands, rendering these companies "bullet-proof" under Delaware law. State antitakeover laws and the poison pill have dramatically reduced the scope for hostile tender offers in the U.S. market. Both defensive barriers can be overcome only by getting the target board of directors to approve the takeover. Therefore, hostile takeover activity has been moved directly into the boardroom, through the increasing use of proxy fights in conjunction with tender offers that are conditional on the bidder gaining control of the board or approval from the incumbent board. This hybrid proxy/tender offer approach is considerably more expensive, time-consuming, and risky than the hostile tender offer of the eighties. Consequently, hostile takeover activity has declined sharply, and the campaigns that have been waged were long, drawn-out proxy battles. Was all this takeover and LBO activity good for the economy? The issue stirs strong emotions on both sides, but I believe the evidence shows that takeovers and buyouts are a good thing. Many published studies have documented the effects of tender offers and mergers on stock prices. The consensus is that these transactions confer large stock-price gains on target shareholders, averaging about 30 to 50 percent over preoffer prices during the eighties. The evidence on returns to bidders, however, is mixed. During the period from 1960 to 1980, the average stock-price gain to bidding firms was 3 to 5 percent. But during the eighties the returns to bidders began to erode, and some studies conclude that bidder firms suffered modest stock-price declines, on average, during the late eighties. The principal reason for this erosion is the increased competition for targets. This increase in competition resulted from the target's greater effectiveness at dealing with the initial suitor and at getting rival bids, including bids from the targets' own management. The winning bidders in these auction contests of the late eighties frequently paid top dollar and saw their stock prices decline when the market learned that they had "won." Nonetheless, the huge gains to target shareholders mean that takeovers and so called highly leveraged transactions (HLTs) have created large net economic gains. Indeed, Harvard's Michael Jensen estimates that over the fourteen-year period from 1976 to 1990, the $1.8 trillion of tender offers, mergers, divestitures, and LBOs created over $650 billion in value for selling-firm shareholders. Moreover, this estimate does not include the additional large gains made by companies that restructured out of fear of being taken over. Although this estimate excludes the gains and losses to shareholders of bidding firms, the empirical studies that find net losses for bidders also show that these losses—at 1 to 3 percent of the stock price—are minuscule compared with the enormous gains to target shareholders. These academic studies show clearly, on the basis of share prices, that hostile takeovers and highly leveraged transactions created huge increases in the values of companies. Moreover, several follow-up studies have shown that these stock-price gains are generally reliable predictors of real operating improvements and of increased corporate efficiency. Critics of takeovers often complain that these share-price gains ignore the economic losses that takeovers and LBOs impose on other groups connected with the target firms. This intense debate has centered on the potential harm to corporate "stakeholders" other than shareholders, such as bondholders, employees, customers, suppliers, local communities, and taxpayers. Many takeovers in the airline industry, for example, have involved conflict between acquiring-firm management and the unionized labor of the target firm. These conflicts contributed to the popular view, shared by some economists, that shareholder premiums from takeovers come largely at the expense of labor's wages and benefits. But the empirical research has failed to show any reliable association between takeover activity and the income of workers. According to Joshua Rosett's recent study of over five thousand union contracts in over a thousand listed companies from 1973 to 1987, less than 2 percent of the premiums to shareholders can be attributed to wage reductions in the first six years following takeovers. In hostile takeovers the data show an increase in union wages in years following the control changes. Another frequent complaint is that the constant threat of hostile takeovers forces nearly all corporate managers to stress short-term policies at the expense of more valuable long-term plans, thereby impairing the economic health and competitive vigor of their companies and the nation. Although rhetorically stirring, this theory has been studied thoroughly by economists and has received no empirical support. For example, the research shows no connection between takeover activity and public companies' expenditures on research and development. Studies also show that share prices generally respond positively to long-term investments by corporations. Also unsupported is the charge that losses to bondholders finance the shareholder gains from takeovers. Although some shareholder gains have come at the expense of bondholders, banks, and other creditors who financed these deals, Michael Jensen estimates that the aggregate amount of these losses between 1976 and 1990 is not likely to exceed $50 billion, a small fraction of the $650 billion gain to target shareholders. There is some empirical basis for the idea that reducing taxes was at least a partial motive for takeovers, and especially LBOs. Some researchers estimate that for the typical leveraged buyout, tax savings (from deducting higher interest payments) accounted for about 15 percent of the premiums paid to sellers. Still, most mergers and tender offers were not motivated by tax savings. Also, Jensen has found that, contrary to popular assertion, LBOs have actually increased total tax payments to the U.S. Treasury. That is because selling shareholders pay taxes on their gains. All in all, the evidence shows that tax savings account for only a small fraction, at most, of the huge gains to target shareholders and other selling firms. In sum, although some individuals (incumbent management, for example) and some other groups obviously lose in any takeover, the empirical studies offer little or no support for the notion that the huge gains to shareholders reflect similarly large losses to other related parties. These zero-sum theories cannot begin to explain the large shareholder returns. The bottom line is that, on average, takeovers reflect wealth-enhancing and socially valuable redeployments of corporate resources. Although several of these late-eighties LBOs and leveraged cash-outs ran into financial difficulties when the U.S. economy suffered a recession in the early eighties, there is much evidence that the LBO phenomenon also has been beneficial for our economy. Economists have found that the "free cash-flow" theory (developed by Michael Jensen) helps them to understand much of this activity. This theory postulates that high leverage can be a powerful disciplining device because it forces top management to undertake value-enhancing strategic changes. Companies with ample cash flow but few potentially profitable investment projects should pay out the excess cash to shareholders to maximize shareholder value. According to this theory managements that fail to pay out excess cash, instead investing it in diversifying acquisitions or in low pay-off projects, will cause the stock price of their companies to be below their optimal value, creating a value gap. LBOs and other leveraged recapitalizations force managements to sell unprofitable divisions, avoid low pay-off investments, eliminate wasteful corporate expenses and diversifying acquisitions, and boost operating efficiency in order to meet the interest charges on the high level of debt. These forced efficiencies eliminate the value gap and create net economic gains for shareholders. Although this is a severe solution that exposes the firm to financial distress in the few years after the LBO, the evidence is that the LBOs and leveraged restructurings of the eighties created large net gains for shareholders. In short, the U.S. market for corporate control witnessed unprecedented activity and change during the eighties as the largest public companies became frequent targets of hostile takeovers. Corporate managers reacted to this activity by lobbying hard for legal restrictions on the so-called raiders, and by restructuring and refocusing their companies while increasing debt levels and shareholder payouts. Answer the following questions: 1. What is the main feature of a hostile takeover? 2. What is the core difference between a hostile takeover and a merger? 3. What does LBO stand for? 4. Which factors induced the explosion in large takeovers? 5. What does the «poison pill» refer to? 6. What effect did takeovers and LBO activity exert on the economy? 7. What are the drawbacks of takeovers? About the Author Gregg A. Jarrell is a professor of economics and finance at the University of Rochester's Simon School of Management. He was formerly chief economist at the U.S. Securities and Exchange Commission. He is the founder of the Shadow Securities and Exchange Commission. =How Hostile Takeovers Work = by Ed Grabianowski Mergers and acquisitions: These two words represent how companies buy, sell and recombine businesses. They're also the reason why today's corporate landscape is a maze of conglomerations. Insurance companies own breakfast cereal makers, shopping mall outlets are part of military manufacturing groups, and movie studios own airlines, all because of mergers and acquisitions. Not all M&As are peaceful, however. Sometimes, a company can take over another one against its will -- a hostile takeover. How can they do that? In this article, we'll find out how hostile takeovers happen, how to prevent them and why a hostile takeover isn't always a bad thing. Mergers and Acquisitions hen two companies merge, the boards of directors (or the owners, if it is a privately held company) come to an agreement. The original companies cease to exist, and a new company forms, combining the personnel and assets of the merging companies. Like any business deal, this can be straightforward, or incredibly complex. The key is that both companies have agreed to the merge. In an acquisition, one company purchases another. The purchased company ceases to exist, or it becomes a part of the buying company. The buying company owns all assets, including the name of the company, their equipment, their personnel and even their patents and other intellectual property. However, just like a merger, the boards or owners of both companies have agreed to the transaction. A hostile takeover is an acquisition in which the company being purchased doesn't want to be purchased, or doesn't want to be purchased by the particular buyer that is making a bid. How can someone buy something that's not for sale? Hostile takeovers only work with publicly traded companies. That is, they have issued stock that can be bought and sold on public stock markets. (Check out How Stocks and the Stock Market Work for more information.) A stock confers a share of ownership in the company that issued it. If a company issued 1,000 shares, and you own 100 of them, you own a tenth of that company. If you own more than 500 shares, you own a majority or controlling interest in that company. When the company makes major decisions, the shareholders must vote on them. The more shares you have, the more votes you get. If you own more than half of the shares, you always have a majority of the votes. In many respects, you can control the company. So a hostile takeover boils down to this: The buyer has to gain control of the target company and force them to agree to the sale. We'll explain how it's done in the next section. Reasons for Hostile Takeovers There are several reasons why a company might want or need a hostile takeover. They may think the target company can generate more profit in the future than the selling price. If a company can make $100 million in profits each year, then buying the company for $200 million makes sense. That's why so many corporations have subsidiaries that don't have anything in common -- they were bought purely for financial reasons. Currently, strategic mergers and acquisitions are more common. In a strategic acquisition, the buyer acquires the target company because it wants access to its distribution channels, customer base, brand name, or technology. These purchase factors are the same for friendly acquisitions as well as hostile ones. But sometimes the target doesn't want to be acquired. Perhaps they are a company that simply wants to stay independent. Members of management might want to avoid acquisition because they are often replaced in the aftermath of a buyout. They are simply protecting their jobs. The board of directors or the shareholders might feel that the deal would reduce the value of the company, or put it in danger of going out of business. In this case, a hostile takeover will be required to make the acquisition. In some cases, purchasers use a hostile takeover because they can do it quickly, and they can make the acquisition with better terms than if they had to negotiate a deal with the target's shareholders and board of directors. The two primary methods of conducting a hostile takeover are the tender offer and the proxy fight. A tender offer is a public bid for a large chunk of the target's stock at a fixed price, usually higher than the current market value of the stock. The purchaser uses a premium price to encourage the shareholders to sell their shares. The offer has a time limit, and it may have other provisions that the target company must abide by if shareholders accept the offer. The bidding company must disclose their plans for the target company and file the proper documents with the Securities and Exchange Commission (SEC). The 1966 Williams Act put restrictions and provisions on tender offers. Sometimes, a purchaser or group of purchasers will gradually buy up enough stock to gain a controlling interest (known as a creeping tender offer), without making a public tender offer. This bypasses the Williams Act, but is risky because the target company could discover the takeover and take steps to prevent it. In a proxy fight, the buyer doesn't attempt to buy stock. Instead, they try to convince the shareholders to vote out current management or the current board of directors in favor of a team that will approve the takeover. The term "proxy" refers to the shareholders' ability to let someone else make their vote for them -- the buyer votes for the new board by proxy. Often, a proxy fight originates within the company itself. A group of disgruntled shareholders or even managers might seek a change in ownership, so they try to convince other shareholders to band together. The proxy fight is popular because it bypasses many of the defenses that companies put into place to prevent takeovers. Most of those defenses are designed to prevent takeover by purchase of a controlling interest of stock, which the proxy fight sidesteps by changing the opinions of the people who already own it. The most famous recent proxy fight was Hewlett-Packard's takeover of Compaq. The deal was valued at $25 billion, but Hewlett-Packard reportedly spent huge sums on advertising to sway shareholders http://news.com.com/2100-1001-272519.html ref. HP wasn't fighting Compaq -- they were fighting a group of investors that included founding members of the company who opposed the merge. About 51 percent of shareholders voted in favor of the merger. Despite attempts to halt the deal on legal grounds, it went as planned. Next, we'll see how a company can defend against a hostile takeover. Defenses Against Hostile Takeovers There are several ways to defend against a hostile takeover. The most effective methods are built-in defensive measures that make a company difficult to take over. These methods are collectively referred to as "shark repellent." Here are a few examples: ñ The Golden Parachute is a provision in a CEO's contract. It states that he will get a large bonus in cash or stock if the company is acquired. This makes the acquisition more expensive, and less attractive. Unfortunately, it also means that a CEO can do a terrible job of running a company, make it very attractive for someone who wants to acquire it, and receive a huge financial reward. ñ The supermajority is a defense that requires 70 or 80 percent of shareholders to approve of any acquisition. This makes it much more difficult for someone to conduct a takeover by buying enough stock for a controlling interest. ñ A staggered board of directors drags out the takeover process by preventing the entire board from being replaced at the same time. The terms are staggered, so that some members are elected every two years, while others are elected every four. Many companies that are interested in making an acquisition don't want to wait four years for the board to turn over. ñ Dual-class stock allows company owners to hold onto voting stock, while the company issues stock with little or no voting rights to the public. That way investors can purchase stocks, but they can't purchase control of the company. In addition to takeover prevention, there are steps companies can take to thwart a takeover once it has begun. One of the more common defenses is the poison pill. A poison pill can take many forms, but it basically refers to anything the target company does to make itself less valuable or less desirable as an acquisition: ñ The people pill - High-level managers and other employees threaten that they will all leave the company if it is acquired. This only works if the employees themselves are highly valuable and vital to the company's success. ñ The crown jewels defense - Sometimes a specific aspect of a company is particularly valuable. For example, a telecommunications company might have a highly-regarded research and development (R&D) division. This division is the company's "crown jewels." It might respond to a hostile bid by selling off the R&D division to another company, or spinning it off into a separate corporation. ñ Flip-in - This common poison pill is a provision that allows current shareholders to buy more stocks at a steep discount in the event of a takeover attempt. The provision is often triggered whenever any one shareholder reaches a certain percentage of total shares (usually 20 to 40 percent). The flow of additional cheap shares into the total pool of shares for the company makes all previously existing shares worth less. The shareholders are also less powerful in terms of voting, because now each share is a smaller percentage of the total. Some of the more drastic poison pill methods involve deliberately taking on large amounts of debt that the acquiring company would have to pay off. This makes the target far less attractive as an acquisition, although it can lead to serious financial problems or even bankruptcy and dissolution. In rare cases, a company decides that it would rather go out of business than be acquired, so they intentionally rack up enough debt to force bankruptcy. This is known as the Jonestown Defense. In the next section, we'll weigh the costs and benefits of hostile takeovers. Who Benefits from a Hostile Takeover? While companies fight tooth and nail to prevent hostile takeovers, it isn't always clear why they're fighting. Because the acquiring company pays for stocks at a premium price, shareholders usually see an immediate benefit when their company is the target of an acquisition. Conversely, the acquiring company often incurs debt to make their bid, or pays well above market value for the target company's stocks. This drops the value of the bidder, usually resulting in lower share values for stockholders of that company. Some analysts feel that hostile takeovers have an overall harmful effect on the economy, in part because they often fail. When one company takes over another, management may not understand the technology, the business model or the working environment of the new company. The debt created by takeovers can slow growth, and consolidation often results in layoffs. Another cost of hostile takeovers is the effort and money that companies put into their takeover defense strategies. Constant fear of takeover can hinder growth and stifle innovation, as well as generating fears among employees about job security. Ultimately, we must measure the costs of mergers and acquisitions on a case-by-case basis. Some have been financial disasters, while others have resulted in successful companies that were far stronger than their predecessors were.